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Monetary Rules When Economic Behaviour Changes Author info | Abstract | Publisher info | Download info | Related research | Statistics Amano, Robert
Coletti, Don
Macklem, Tiff
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This paper examines the implications of changes in economic behaviour for simple inflation-forecast–based monetary rules of the type currently used at two inflation-targeting central banks. Three types of changes in economic behaviour are considered, changes that are motivated by developments in monetary and fiscal policy in the 1990s: changes in monetary policy credibility, changes in the slope of the Phillips curve, and changes in the degree of income stabilization from automatic fiscal transfers. Analysis is conducted using stochastic simulations of a model of the Canadian economy. Two questions are posed: First, what are the implications of these types of changes in economic behaviour for the stochastic properties of the economy? Second, how are efficient inflation-forecast–based rules affected by these changes in behaviour? Perhaps the most interesting results are with respect to credibility. When monetary credibility increases, the central bank can attain more stable output and inflation. But increasing credibility is a double-edged sword. To reap its benefits, the central bank must, in general, adjust its reaction function. If it does not, volatility can increase.
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Paper provided by Bank of Canada in its series Working Papers with number
99-8.
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Length: 55 pages
Date of creation: 1999Date of revision:
Handle: RePEc:bca:bocawp:99-8Contact details of provider: Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada Phone: 613 782-8899 Fax: 613 782-8874 Web page: http://www.bank-banque-canada.ca/
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Keywords: Credibility ; Monetary policy framework ; Uncertainty and monetary policy ; Other versions of this item:
Find related papers by JEL classification: E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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